Moody's downgrades Puerto Rico credit rating

SAN JUAN, Puerto Rico – Puerto Rico's credit rating was dealt its second blow in a week when Moody's Investors Service announced Friday it had downgraded the U.S. territory's debt to junk status.

The downgrade of two notches came just days after Standard & Poor's downgraded the island's debt by one notch, prompting the local government to file new legislation aimed at shoring up the economy as it prepares to re-enter the bond market this month.

Moody's said Puerto Rico's government took strong and aggressive actions to control spending and reduce debt issuance, among other things, but that it remained concerned about its liquidity and ability to access the market.

"While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends," the agency said. "Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise."

Treasury Secretary Melba Acosta said Puerto Rico has sufficient liquidity through the end of the fiscal year, and she noted the government is still pursuing arrangements for additional liquidity.

"We strongly disagree with Moody's decision, and we will not relent in our plans to strengthen our fiscal situation," she said.

Gov. Alejandro Garcia Padilla said his administration has worked hard to diversify Puerto Rico's economy and grow its industrial base.

"The requirements for liquidity, legislative action and economic and budgetary performance have been unequivocally surpassed," he said.

Garcia and other top officials have pledged that they would continue to reduce the debt and present a deficit-free budget next fiscal year. Garcia also has said he will strengthen the liquidity of Puerto Rico's Government Development Bank, which decreased sales of new bonds late last year because of high interest rates.

Jaime Perello, president of the island's House of Representatives, blasted Moody's announcement.

"This action is unfair and contradictory given the progress of this administration in digging the island out of this fiscal crisis," he said.

Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes, and investors have become increasingly concerned about its ability to repay its debt. Puerto Rican debt is held by roughly 70 percent of U.S. municipal mutual funds, according to Morningstar.

Alan Schankel, managing director of Janney Capital Markets in Philadelphia, said Moody's announcement does not change the market dynamic in a significant way because many expected it.

"It doesn't close the door, but it probably makes a new issuance marginally more challenging," he said.

Fitch Ratings warned in November that it could downgrade Puerto Rico's debt, but the credit rating agency has not taken action.

Puerto Rico is struggling with $70 billion in public debt accumulated over several decades. The island of 3.67 million people also has entered its eighth year in recession and faces a 15.4 percent unemployment rate, higher than any U.S. state.